Another group of prominent economists have signed a letter to the Guardianpointing out that Alistair Darling's budget is more orthodox than it first appears. It does nothing substantial about banking reform, and while it pays token attention to a Green New Deal, there is no mention of a Robin Hood tax. Crucially, Darling's budget accepts the logic of deficit reduction through massive cuts while differing with the Tories only on the timing of the cuts.

Darling, Brown et al are not economic illiterates. When Ed Miliband tries to regain a few core voters by injecting some radical elements into Labour's manifesto, they will make sure that nothing too radical emerges. Indeed, Darling has affirmed that his cuts will be deeper than under Thatcher.Why? Because the chancellor understands the need to send reassuring signals to the international financial markets.

Imagine for a moment the chancellor announcing that budget balance doesn't matter over the coming parliament, that a 4% inflation target is entirely acceptable and that only state investment-led growth will get us out of crisis; ie that we need to spend at least £30bn a year or 2% of GDP (Lord Stern's figure) on a Green New Deal. Imagine him saying that the money will be made available either through quantitative easing or by adopting a Robin Hood tax. This is what I and many progressive economists would like to hear. Even Vince Cable might agree.

The result could be the immediate downgrading of Britain's credit rating and – far more seriously – another fall in sterling's nominal value similar to that in 2008, perhaps bringing it down to €0.80. That sort of shock would precipitate even more loss of confidence, and quite possibly another round of banking failure. Of course, we cannot know with certainty that this would follow – but even if there is only a 50/50 chance, no sane chancellor could afford to take the risk. The simple political truth is that Britain is deeply vulnerable to financial attack.

There are two ways out. One is to impose capital controls. But such controls, supposing for a moment that capital controls could be effectively imposed in today's world, would be tantamount to closing down much of the City of London and inviting retaliatory trade attack. Crucially, such controls are incompatible with EU membership, and the EU accounts for nearly 60% of UK trade. Leaving the EU is neither a sensible nor a realistic option.

The other solution is to join the euro. That is no panacea either. It would take time, it would entail conditionality and a referendum on the matter would probably produce a no vote. Some might argue that the EU stability and growth pact is at least as fiscally constraining as meeting current Treasury rules and that joining the euro would leave Britain unable to pursue an independent monetary policy. Others might argue that without the power to set interest rates, we would run the risk of a new housing bubble. But our monetary policy is already constrained by world financial markets, and the power to set interest rates has not prevented our housing bubble.

At present, the prospect for improved economic governance seem poor, particularly given the failure of the eurozone to adopt a common stimulus package, much less show solidarity with the Club Med countries. But Britain can hardly boast about its own record, having opposed new EU rules on financial market reform, or for that matter having pushed for the IMF to help bail out Greece.

Such arguments may appear arcane, but the underlying assumption is clear enough. Britain cannot avoid cuts and pursue radical Keynesian stimulus and redistributive policies, much less effect a proper Green New Deal, given the vulnerability of sterling. Without a financial shield, Britain almost certainly faces the erosion of its social services, a collapsing infrastructure and long-term stagnation.